Midwest manufacturing growth gives economy a boost

February 01, 2003|By From Tribune news services.

Three reports released Friday underscored the start-and-stop nature of the nation's economic recovery.

Midwest manufacturing activity increased in January at its strongest pace since last May, but another key indicator showed that consumer sentiment dropped more than expected in January, a month after consumer spending posted its biggest gain in five months.

The National Association of Purchasing Management-Chicago index rose to 56.0 from a revised 51.7 in December. A reading below 50 indicates a contracting manufacturing sector, while a reading above 50 signals expansion.

The reading was the highest since the index stood at 59.2 in May and surpassed economists' forecasts for a rise to 52.6.

"They were encouraging numbers," said Gary Thayer, chief economist at AG Edwards & Sons Inc. "I think this suggests the economy is strengthening going into the first quarter. Maybe we're moving into a better quarter than the last quarter."

Other analysts cautioned that stronger data are needed to confirm a full-fledged economic recovery.

"It's something hopefully we can build on," said Carl Tannenbaum, chief economist at LaSalle Bank in Chicago. "We have to see some harder numbers on manufacturing before we can conclude the worst is over."

The Chicago numbers are closely watched by economists and investors seeking a clue to the national manufacturing sector.

The most recent data from the Commerce Department showed that manufacturing output in the Great Lakes region, or Midwest, was worth about $351 billion in 2000, second only to the Southeast. The Commerce Department divides the U.S. into eight regions.

The new orders component of the index rose to 58 from 56 in December. New orders can spur hiring in the manufacturing sector, as increased production sometimes requires a larger workforce. But the employment component of the index fell to 45.6 from 48.1 in December.

"What it means for the economy is that even though the headline index implies faster growth, the employment index tells you it is not fast enough," said Chris Low, chief economist at FTN Financial. "This is not yet a real recovery."

Also Friday, the University of Michigan's revised consumer sentiment index fell to 82.4 in January from 86.7 in December. Economists had expected a reading of 83. The preliminary January reading, taken at midmonth, was 83.7.

The index was once again driven lower by the expectations component, which gauges attitudes about the next 12 months. It fell to 72.8, its lowest level since November 1993. That was down from 80.8 in December and a midmonth level of 75.2.

"Clearly, worry about war, stocks and the economy are still on the rise," said Low. "Consumers seem more convinced than ever that a double-dip recession is in the works."

The decline in how consumers view the coming year followed a 0.9 percent increase in consumer spending in December, according to the Commerce Department, much of it coming from a splurge on discounted autos. Spending on durable goods, such as cars, jumped by 6.1 percent, the largest increase since October 2001.

The 0.9 percent gain was the biggest increase since a 1.1 percent rise in July 2002. Economists had expected a 0.7 percent increase. Personal income rose 0.4 percent, the best gain since June 2002. Economists had predicted a 0.2 percent increase.